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Published in: Review of Quantitative Finance and Accounting 4/2023

16-03-2023 | Original Research

Open-market stock repurchases, insider trading, and price informativeness

Authors: Gow-Cheng Huang, Kartono Liano, Ming-Shiun Pan

Published in: Review of Quantitative Finance and Accounting | Issue 4/2023

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Abstract

This study examines insider buying before stock repurchase announcements as an undervaluation signal. We find that firms are more likely to announce a repurchase program when insiders purchase shares, particularly when purchases are made by top executives. Moreover, the effect of insider purchases on announcing a stock repurchase program is more pronounced when stock prices convey more information that is new to managers. We find that insider purchases, particularly purchases by CEOs and CFOs, are positively associated with the market reaction to the share repurchase announcements. Furthermore, investors pay more attention to purchases by CEOs and CFOs when stock prices are less informative. Finally, we find similar results for the relation between insider purchases and post-announcement stock returns.

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Footnotes
1
In addition to signaling, the finance literature suggests several motives for repurchasing shares, including distributing excess cash to shareholders, supporting both management and employee stock option exercises, preventing takeover, and increasing financial leverage ratio, among others. Dittmar (2000) finds that a firm’s repurchasing decision tends to be influenced by multiple motives. In most cases, repurchases are made to take advantage of stock undervaluation.
 
2
Amihud’s illiquidity ratio and idiosyncratic return variation are commonly used to measure stock price informativeness (e.g., Ferreira et al. 2011; Fresard 2011; De Cesari and Huang-Meier 2015; Coen and de La Bruslerie 2019, among others).
 
3
Abnormal return is the daily stock return difference between a firm and the CRSP equally weighted index. We do not calculate abnormal return using the market model. Since share repurchases are usually conditioning on large price decreases prior to the announcements, the calculation of abnormal return using the market model based on price data before repurchases likely will bias the abnormal return upward. Instead, we use the CRSP equally weighted index as a benchmark to calculate abnormal return.
 
4
The results for the control variables are not reported to save space.
 
5
This probability is calculated as the difference in probabilities of announcing a repurchase program with a one-standard deviation change in insider purchase. The probability of announcing a repurchase program is converted from the odds of announcing a repurchase program; i.e., probability = odds/(1 + odds).
 
6
The mean 5-day CAR relative to the matching firm is 1.475% (see Table 1).
 
Literature
go back to reference Blau B, Fuller K, Walker MM, Wang H (2014) Divergence of opinion and open market share repurchases. In: Working paper. Utah State University Blau B, Fuller K, Walker MM, Wang H (2014) Divergence of opinion and open market share repurchases. In: Working paper. Utah State University
go back to reference Jensen MC (1986) Agency costs of free cash flow. Am Econ Rev 76:323–329 Jensen MC (1986) Agency costs of free cash flow. Am Econ Rev 76:323–329
Metadata
Title
Open-market stock repurchases, insider trading, and price informativeness
Authors
Gow-Cheng Huang
Kartono Liano
Ming-Shiun Pan
Publication date
16-03-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 4/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01142-7

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